May we pay less rent?
We have seen requests from tenants to pay less rent for a fixed period of 3 or 4 months, for the period during which the Covid-19 virus affects trade and for the remainder of a lease. Sometimes these requests are coupled with a proposal to pay the arrears caused by the reduced rent at a later date, which will increase the likelihood of such a request being accepted promptly.
Leases, except where rent is entirely calculated by turnover, do not contain provisions allowing reductions in rent. This may change in the future. In one recent Landlord and Tenant 1954 Act lease renewal claim, the court imposed an upward or downward rent review into a renewal lease. However, at present, rent can only be reduced or delayed by agreement between a landlord and a tenant.
If your landlord is prepared to negotiate a change to your rent payment obligations under the terms of your lease, this arrangement should be documented. If it is not, there is a risk of future dispute. For example, if a clear record is not made of the period of rent suspension or reduction, this may very well be disputed once landlords see the Government lifting restrictions and once they think economic conditions are improving.
A change in rent payment terms can best be recorded in a side letter. This is preferable to a deed of variation of a lease, as a variation is more time consuming to negotiate. The side letter should contain:
- the new rental payment terms including the terms, if any, of repayment of the accrued arrears;
- the length of time for which these new arrangements will last and the situations when the landlord can revoke the concession;
- a statement that the other lease terms remain unaffected by the concession and that the letter will be disregarded on rent review;
- agreement as to what happens when either party assigns their interest;
- confidentiality provisions; and
- the agreement of any guarantor (including guarantors under AGAs) to its terms.
May we suspend rent payments for a period?
Some landlords, such as Network Rail, have agreed to waive their tenants' March quarter rents. Others such as the City of London Corporation have agreed to suspend rent payments. If your landlord is willing to waive or suspend payment of rent for a limited period, the terms of this agreement should be recorded. The landlord's ability to take action for reduced or non-payment of rents should be suspended during this period. Recent legislation protects commercial tenants from forfeiture for non-payment of rent before the end of June. The Government has announced that landlords will also be restricted from using commercial rent arrears recovery, statutory demands and winding up petitions as tools to get tenants to pay rent before the end of June. Despite this, recording the terms of any concession in writing should lessen the risk of dispute later.
Can we settle how much rent we pay without asking the landlord?
You are not entitled to reduce the rent you pay under your lease without your landlord's agreement. Following the 25 March quarter day some tenants have paid a single month's rent rather than a full quarter's. If a landlord accepts one month's rent it will not lose the right to recover the additional two month's rent as a debt if they remain unpaid. Because of this, agreeing to pay a third of the quarterly rent rather than simply paying a month's rent will give you greater certainty that your landlord will not take action immediately.
The risk in unilaterally paying a single month's rent is that, subject to the terms of your lease, a landlord can still take action for the unpaid rent.
The Government has suspended landlords' ability to forfeit for arrears of rent. Claims for possession as a result of forfeiture for arrears that have already begun will be suspended and existing possession orders will not be enforced until after 30 June at the earliest.
The Government has now announced further measures to protect tenants. It is not yet clear whether these will apply to all commercial tenants or be targeted at the most seriously affected retail, hospitality and leisure tenants. The announced measures relate to landlords' use of Commercial Rent Arrears Recovery ("CRAR"), statutory demands and winding up petitions to force tenants to pay rent.
CRAR enables a landlord to take a tenant's goods from a premises as security for unpaid rent. To do this a landlord must serve a notice 7 clear working days before it, through an enforcement agent, attempts to enter premises to take control of goods. An enforcement agent is only entitled to enter premises between 6.00 – 21.00 if they are open except if a tenant has deliberately removed goods to avoid CRAR. In that case the enforcement agent may be able to get a warrant from court to break in. Commonly, rather than removing goods, a landlord will seek to enter into a controlled goods agreement that allows it to come back and take possession later if the arrears of rent are not paid.
In the existing circumstances it is likely that very few, if any, landlords will seek to exercise CRAR. This cannot be done if premises are closed, it requires coordination of a group of enforcement agents, which may be difficult, and there is unlikely to be any market for most goods that will be removed. In addition the changes to legislation announced on 23 April increase the amount of rent that must be owing before a landlord can start CRAR from 7 days to 90 days. This completely covers rent arrears for the March quarter of 2020.
The proposed legislation will also prevent landlords asserting that a tenant is insolvent for arrears of rent through a statutory demand and from applying to court for the insolvency of a tenant because of arrears of rent. The details of how this proposed legislation will work is not yet clear.
We are not going to pay elements of the service charge that are Covid-19 related
Where a landlord of multi-let premises has incurred costs in connection with its response to Covid-19 which are outside its usual service charge expenditure, some tenants are trying to argue that such costs are for the landlord to pay, or should be recovered under its insurance policies, rather than being passed on to tenants via the service charge. Whether or not this is a good argument will depend on the drafting of the service charge provisions in a lease. Most leases will allow recovery of costs incurred by a landlord in relation to compliance with statute, regulations, health and safety measures, safety and security and the well-being of tenants.
Tenants should, where possible, exercise their rights to review service charge budgets and accounts to satisfy themselves that the costs of services incurred are reasonable in the current circumstances. Whilst landlords will have many on-going service charge costs that cannot be easily suspended, tenants should enquire whether, for example, staff providing services could be furloughed under the Coronavirus Job Retention Scheme or if other services could be temporarily withdrawn.
Can we change the terms of the lease permanently because we expect difficult trading conditions?
A tenant is not entitled to seek permanent variation of a lease without the landlord's agreement. If a tenant tried to argue that because of the change in conditions it should be entitled to change the lease terms, a court would be likely to say that the changing conditions were a risk a tenant accepts when it takes a lease. Some forward-thinking landlords may be willing to vary leases for the term but we have yet to see any landlord agree to this.
Can we terminate our lease?
If you would like to terminate your lease and a landlord would like to recover premises, now is likely to be an opportunity to do so. This is more likely to be attractive for a landlord if it already has plans for development or works to the building. We cover this in section 3 below.
For tenants who have served break notices and are expecting their leases to terminate as a result during the lockdown period, it is very important to check the terms of the break in their lease. These may require putting the premises back into a particular condition such as by removing alterations and they will almost certainly require the delivery up of premises with vacant possession. Each lease is different and tenants must consider what their break clause requires. As a general point, it is still possible to employ contractors to remove possessions from properties and the courts are unlikely to accept that Covid-19 provides grounds for a tenant to ignore the conditions of a break. Please contact us if you need advice on a lease break or break notice.